In FSA integration Chapter. It says when you sell receivables(securitize them) it impacts your assets and your liabilities? How does it impact your liabilities? I thought when your sold receivables, your assets stayed the same, an inflow of cash and a reduction of A/R. But to show how the co would be with the receivables, I have to add the receivables sold to assets and to liabilities. Why?
Key is to think of it from an Analyst perspective and not from Accounting perspective. Assume nothing happened to your A/R and the cash you got by selling it, is the debt you got with A/R as collateral. This is going to be analysed in this manner, specially when you have sold A/R with recourse option. So, from an Analyst perspective, A/R sale with recourse option is: A/R account: No change Cash account: increased by as much as A/R sales Liabilities: increased by as much as increase in cash due to A/R sales
I am not referring to the FSA chapter but rather responding to your question. The answer is: it depends. When you securitize receivables (AR), it depends on whether the security is sold to a 3rd party or to an SPV where the company takes up the risk and residual rewards. If you sell it to a 3rd party without recourse, cash goes up receivables go down, making liabilities and equity hold steady. If you sell it to an SPV and continue to consolidate the same, status quo balance sheet. Now, if you assume that you have already securitized the AR and sell it to a third party, but later have to adjust the balance sheet to reflect the AR, then both AR and the corresponding liabilities increase.
What is the corresponding liability for the AR? When you create an AR isnt it revenue that has yet to be received?
when you securitize AR - you reduce AR, increase Cash - both on Asset side of BS. now if you have sold the AR to a 3rd party with recourse - you have essentially received a loan. So to adjust - you put back the AR on the Asset side, and a Loan (liab) on the L side to balance your BS.
In many cases the receivables that you have on your books have been financed by short-term loans, so when you securitize you use the proceeds to reduce debt, not to increase cash. That’s why when you add back the AR you put the ofset into short term debt, rather than reducing cash.
Thank all of ya’ll that helped alot
Unless you use rule 105 like Lehman and sell assets with the agreement to repurchase them but are allow to not show them as a liability.